Frontline documentary: http://www.pbs.org/wgbh/pages/frontline/shows/walmart/
High cost of low price - http://video.google.com/videoplay?docid=-3836296181471292925
Author: Charles Fishman
Review: wharton review
A group of independent bottling companies has gone to court against Coca-Cola and its largest bottler, Coca-Cola Enterprises Inc., to stop the nationwide rollout of a new direct-to-warehouse distribution system for Coke's Powerade sport drinks. The small bottlers, who manage sales and promotions by delivering product to individual stores, stocking shelves and setting up displays, are arguing that the warehouse delivery system threatens their business model. The bottlers handle about 10 percent of Coke's U.S. distribution.
The Wall Street Journal reports that some analysts believe change is overdue in the bottling business. But, beyond what can be learned about the beverage category, the dispute provides an example of what Charles Fishman would call the Wal-Mart effect. Published reports state that the new system is being implemented for Wal-Mart, at the giant retailer's request. It's a late-breaking example of Wal-Mart affecting an operational change in the companies from which it buys merchandise.
On its own, this move would not make Wal-Mart different from any other large company that actively manages its supply chain. But in his new book, "The Wal-Mart Effect: How the World's Most Powerful Company Really Works -- and How It's Transforming the American Economy," Fishman details how Wal-Mart influences not only its suppliers, but also our shopping patterns, our ideas about quality and consumption, and the character of communities. The Wal-Mart effect resonates throughout the economy. The small bottlers, for example, are concerned that other grocery chains will want direct to warehouse distribution as well. Fishman argues that Wal-Mart, and a few other mega corporations, because of their size are something entirely new that we don't yet understand.
More than a store
"Wal-Mart isn't just a store, or a huge company, or a phenomenon anymore. Wal-Mart shapes where we shop, the products we buy, and the prices we pay -- even for those of us who never shop there," Fishman writes. "It reaches deep inside the operations of the companies that supply it and changes not only what they sell, but also how those products are packaged and presented, what the lives of factory workers who make the products are like -- it even sometimes changes the countries where those factories are located … Wal-Mart has become the most powerful, most influential company in the world."
No one, it seems, is on the fence when it comes to Wal-Mart. Some communities have waged wars to keep Wal-Mart out, observing the withering effect on surrounding businesses when the inheritors of Sam Walton's competitive zeal build a big box in a nearby corn field. Its labor practices are the subject of lawsuits currently wending their way through the courts; a California jury recently awarded Wal-Mart workers $172 million for violations of laws governing lunch breaks. The company's lust for ever-lower prices is blamed for the loss of many manufacturing jobs in the U.S. In short, Wal-Mart is a remarkably broad, easy target.
Yet Fishman does not take easy shots. In fact, although the book raises disturbing questions, it's not an anti-Wal-Mart diatribe. Instead, Fishman has taken a close look inside the company and into the environment that it dominates and shapes. He points out the pernicious effects Wal-Mart often produces, but he also acknowledges that consumers -- even those who say they dislike the company -- like the low prices. Marketing studies show that Wal-Mart counts among its customers even those who despise it. In the end, Fishman's analysis leads to conclusion that Wal-Mart is an inexorable and poorly understood force that begs for new public policy thinking.
A look behind the curtain
Some of the most interesting information in Fishman's book concerns Wal-Mart's culture, and its changing impact as the company has grown. Fishman, a senior editor at Fast Company magazine, pursued sources inside Wal-Mart and among its suppliers, and found that doors were more often than not closed to him. Operating from a sort of bunker, Wal-Mart protects itself from what it fears may be unfair criticism (or spying by competitors) by simply refusing to talk. And the silence extends to companies that do business with the giant; many decline to discuss their relationship with Wal-Mart. But the insularity also leads to a cultish devotion to ideas and values that Fishman says are leading to certain outcomes that would have shocked Sam Walton.
The heart of Wal-Mart's culture, Fishman writes, is Sam's legacy -- a workaholic who loved retail and loved even more the thrill of competition. Fishman says that Walton instilled "all-American" values into his staff: "hard work, frugality, discipline, loyalty, a restless effort at constant self improvement." Walton's schedule -- and the hours he demanded of his managers including the mandatory Saturday morning meeting, are legendary. And from the beginning, Fishman reports, Wal-Mart's managers and executives spent those hours -- waking and sleeping-- on the numbers: slicing payroll costs, overhead, prices. Fishman writes that according to recent financial statements, Wal-Mart spends $3.10 less than Target to sell $100 worth of inventory -- the foundation of the every day low price. Every cent is tracked; every expense scrutinized. The mantra is inscribed on Wal-Mart's shopping bags: "Always low prices. Always".
"Buy stuff cheap, sell it cheap," Fishman writes. "And if you're going to sell the same stuff as every other store, but cheaper than they sell it, controlling your costs has to be more than a goal. It has to be a fundamental element of your business every day."
"A Wal-Mart fairy tale"
The story of Makin' Bacon, a microwave dish designed to produce crispy bacon, is what Fishman calls "a Wal-Mart fairy tale." Jonathan Fleck's experience with the giant is an illustration of how good business can be "when the Wal-Mart effect works for everyone." It could be argued that the pressure and discipline of working with Wal-Mart made Fleck, an entrepreneur with one simple product, a better businessman, Fishman writes. The relationship came with the requirement to accommodate. For example, Fleck keeps two computers in his small home office -- the Mac that he prefers and the PC that Wal-Mart insists he own. Fleck uses the PC to log into Retail Link, Wal-Mart's vast proprietary database of information about what is selling, when and to whom. Fleck is a partner -- Wal-Mart's own term -- with the retailer in assuring that every foot of shelf space is making its goal for sales.
Wal-Mart is not Fleck's only customer for his dishes -- he sells about 25 percent of his annual output there. But all of his other customers benefit from the fact that he deals with Wal-Mart. The economies of scale that the big Wal-Mart orders make possible allows Fleck to sell his dish at a lower price to everyone. "The price break for all Makin' Bacon customers comes from Fleck's having Wal-Mart as a foundation customer," Fishman writes. "That's a powerful invisible Wal-Mart effect that has to do simply with scale, focus, efficiency, predictability." In fact, "the pricing and economics of the whole business might not make sense at all without Wal-Mart."
The low everyday pricing, although it imposes fierce discipline, has another positive side for suppliers. Customers learn that if they wait they can catch a sale and stock up. But when prices are predictable, customers will buy when they want or need a product, smoothing out the demand cycle and making life easier for manufacturers.
The high cost of low prices
If Fleck's story is the fairy tale, Vlasic pickles is the nightmare.
Fishman writes that Wal-Mart "fell in love" with Vlasic's gallon jar of pickles. At $2.97 it was a "statement," according to a former Vlasic manager. Vlasic didn't make much money on whole pickles, however. Its margins were achieved through the value-add of slicing -- spears and slices were priced higher than whole cucumbers packed into jars. But customers started buying the $2.97 pickles -- even though a gallon was way too many for a family to consume -- and sales of the sliced products dropped. Vlasic asked for a price increase, but Wal-Mart declined for several years.
Vlasic was caught in what Fishman calls the Wal-Mart squeeze. In a sense, he writes, Wal-Mart's run with gallon jars of pickles actually distorted Vlasic's market. "Wal-Mart's focus on pricing, and its ability to hold a supplier's business hostage to its own agenda, distorts markets in ways that consumers don't see, and ways the suppliers can't effectively counter," he writes. The market did not create the $2.97 price, Fishman says -- it was not the product of customer demand or the cucumber crop. Wal-Mart invented it. "The price -- a number that is a critical piece of information to buyers, sellers and competitors about the state of the pickle market -- the price was a lie," Fishman writes.
The squeeze can have devastating effects on a supplier, contributing in some cases to bankruptcy. Fishman muses that these unintended consequences are the result of blind devotion to a price-cutting strategy that was appropriate to a small string of discount stores, but becomes a wrecking ball when wielded by the largest and most powerful company in the world.
Can it be, Fishman wonders, that Wal-Mart is a new kind of monopoly?
The Wal-Mart effect and public policy
Although it is the nation's largest corporation, Wal-Mart is not alone in its class. Wal-Mart is one of a small handful of mega corporations that represent 20 percent of the economy. But the laws and policies currently in place to monitor these companies are hopelessly antiquated, Fishman writes. The laws governing what publicly traded corporations must report allow Wal-Mart and its cousins to withhold massive amounts of information -- information that would create true transparency about the company's impact. In a democracy -- in a free market economy -- information is vital to sound decision-making, yet Wal-Mart can raise a curtain of secrecy around sales data that virtually every single other retailer shares with economists and researchers.
The questions that transparency would answer are important, Fishman concludes. "These are important questions…precisely because of Wal-Mart's scale -- and the answers would be complicated and hugely revealing…but as a country we have the right to ask the questions."
Fishman's book is a good place to start.
eview by Gerry Donaghy
To help put the economics of Wal-Mart into perspective, I'd like to start by looking at this book as a retail product. Believe it or not, according to walmart.com, Wal-Mart stocks The Wal-Mart Effect. They are selling it for $14.63, which is $11.32 below the price that the publisher has printed on the dust jacket. Without going into specifics of how much the average bookstore pays to stock this book, it's safe to say that Wal-Mart is selling this book for about two dollars more than its wholesale cost. If the average bookstore nets around $12 per copy sold, Wal-Mart only nets $2 (rounding up), meaning that Wal-Mart has to sell six copies of the book to net the same amount of cash that the average independent bookstore makes by selling just one copy. But, Wal-Mart has 3,811 stores, and if every store only sells one copy of The Wal-Mart Effect, they'll net $7,622. A single independent would have to sell 635 copies to make the same revenue on this book.
In The Wal-Mart Effect, Charles Fishman does a commendable job of connecting the various strands (or tentacles if you're not an aficionado of the company) of a corporate ecosystem that affects suppliers, customers, employees, even people who never set foot in a Wal-Mart. The ultimate thesis is that there is a high cost to the low prices that Wal-Mart offers. Some of these costs are high profile, like the sweatshops that created a scandal when it was reported that they were manufacturing Kathie Lee Gifford's signature line of clothing. Some are not so obvious; if you saw what it takes to drive the price of salmon down to below five dollars a pound, you probably wouldn't eat it anymore. Or, how in any county where a Wal-Mart opens, the poverty rate increases (or, more to the point, poverty doesn't decrease as much) as local business are shuttered, unable to compete with this retail leviathan.
Another dark corner of Wal-Mart that Fishman shines his investigative light on involves not so much the code of silence between current Wal-Mart employees, managers and suppliers, but also how the impact of the retailer isn't acknowledged in major economic indicators. For example, when the Consumer Price Index is compiled as a tool to gauge inflation, Wal-Mart's prices are not included in the calculations. So, while Wal-Mart manages to lower prices on certain products from year to year, those results aren't recorded, and their influence ignored. Also, since Wal-Mart doesn't release its specific sales data to clearing houses that compile such information, it's difficult to gauge how much of a segment Wal-Mart actually dominates. If consumers are suddenly eating 15 percent more snack cakes than last year, that figure is suspect because it doesn't account how many snack cakes Wal-Mart sold during the same time.
Early in the book, Fishman hints at what his overarching message would be. He writes in his introduction: "�although there may be some dispute about whether the average Wal-Mart store associate earns $8 an hour or $9 an hour, Wal-Mart could not afford to pay these people $12 an hour. There isn't enough money -- at least not without raising prices." Wal-Mart bears a considerable amount of responsibility for the unfortunate conditions that their commitment to the lowest price creates in terms of human and environmental costs. But they are merely feeding a larger machine, that of consumers addicted to paying as little as possible for things. As Fishman winds up The Wal-Mart Effect he asks, "Do we value cheap merchandise more than good factory jobs?" The answer seems to be a resounding yes when Fishman reports that even people who consider themselves Wal-Mart "rejecters" spend an average of $450 a year there.
It's like the old Pogo cartoon: "We've met the enemy and he is us."
